Defied in Vote, Disney Leader Loses One Post

Published: March 4, 2004

PHILADELPHIA, March 3—
In a remarkable vote of defiance against a once unassailable executive, shareholders owning an estimated 43 percent of the Walt Disney Company declined on Wednesday to support the re-election of Michael D. Eisner, the chairman and chief executive, to the board.

The mounting shareholder dissent prodded the board to strip Mr. Eisner of the chairman's title Wednesday night and give it to George J. Mitchell, Disney's presiding director and a former senator. Disney board members hope the split of the chairman and chief executive titles will pacify investors disgruntled about an underperforming stock price and Mr. Eisner's autocratic management style, according to three people close to the board's deliberations.

But instead of proving that the board is independent, the appointment is sure to be questioned by analysts and investors because the two men are friends and Mr. Mitchell has long been a loyal supporter of Mr. Eisner. The concession could well stoke the campaign against Mr. Eisner, and could ultimately jeopardize his nearly 20-year reign at Disney.

Mr. Eisner, who was unopposed and thus was re-elected to the board, was not the only board member to face significant shareholder dissent, although the percentages of votes withheld for the other 10 nominees were not as high.

As a circuslike scene of demonstrators, tourists and costumed characters developed outside the Pennsylvania Convention Center here, Mr. Eisner took the stage and in a hoarse voice defended the company's financial performance to more than 3,000 investors. ''I love this company,'' he told the rapt crowd. ''The board loves the company. Your company has the management skill and creative talent.''

Providing some of the rollicking action inside the convention center, two former directors leading a campaign to oust Mr. Eisner -- Roy E. Disney, the nephew of the company's founder, and Stanley P. Gold -- were given 15 minutes to address shareholders.

''In essence, you have compromised your soul, lost your integrity,'' Mr. Gold told Mr. Eisner, as well as the other board members.

After Mr. Gold's speech, Mr. Eisner stood at the lectern, looked squarely at Mr. Gold and told him his conclusions were ''fundamentally wrong.'' He described Mr. Gold's presentation as ''rhetoric from critics that replaces reason.'' Disney, Mr. Eisner said, expected earnings to grow 30 percent this fiscal year and by double digits each year through 2007.

Despite the rosy outlook, few executives in recent history have received such an overwhelming vote of no confidence from shareholders. In 2002, nearly one in three shares were withheld in a vote on a Lockheed Martin director, Frank Savage, who also served on the board of Enron. A year later, Stephen M. Case, the departing chairman of AOL Time Warner, received a no-confidence vote of 22 percent after the investment firm Capital Research and Management led the fight to oust him. He soon stepped down from the board.

Despite Wednesday's no-confidence vote, Mr. Eisner still has the board's support. One concern, is that if Mr. Eisner were to resign now with no successor, the company would be vulnerable to takeover attempts; the Comcast Corporation, for instance, made an unsolicited offer three weeks ago. Mr. Eisner, the board has said, still has something to add to the company. And the board wants to make a deliberate decision, not one in haste.

After the shareholders' meeting, Disney's board met Wednesday afternoon at the Four Seasons Hotel to decide how best to respond to investor concerns. Since shareholders also withheld nearly 24 percent of the votes for Mr. Mitchell, some of the other board members worried that the decision to appoint him chairman would be criticized, a person close to the deliberations said.

Disney's board is likely to be criticized no matter what steps it makes. After Mr. Eisner joined the company in 1984, he was credited with turning around a sleepy entertainment company, reviving a moribund animation department and giving new life to the theme parks. But in the last seven years Mr. Eisner's reputation has slipped as Disney's dominance in animation has faded, the fortunes of its ABC network have sagged, and his manner, perceived as arrogant by many critics, has led to the departure of senior executives and the end of Disney's partnership with Pixar Animation Studios, the producer of hits like ''Finding Nemo.''

After the annual meeting, some investors, including several of the 13 pension funds that withheld their votes for Mr. Eisner, again called for Mr. Eisner to step down. Sean Harrigan, president of the board of administration for the California Public Employees Retirement System, said in a statement, ''This discontent is too wide and way too deep in the marketplace, and it has led us to believe that Eisner should go and the board should get quickly to work on planning for an orderly transition.''

Alan G. Hevesi, the comptroller of New York State, said in a statement: ''Today's vote is a wake-up call to Disney management that the company's performance has been inadequate. There have been too many failures, and as a result, Disney's stock has been stagnant.''

For some of the individual investors attending Wednesday's meeting, what rankled most was the perception that Mr. Eisner was not listening to shareholders' concerns. ''I don't think he sees one thing wrong,'' said Peg Rogers of Philadelphia, who attended the meeting with her husband, Kenneth. ''It's his attitude. He disputed everything Stanley said. He can't be right about everything.''

Ms. Rogers and her husband bought 1,600 shares when the stock was trading near $35 a share. She said they sold 800 shares when the stock price was $16 and were keeping the remaining 800, hoping the price rises. ''The way we voted was the proper way,'' Mr. Rogers said. ''We voted no.'' Disney stock closed on Wednesday at $26.65.

Wednesday's board meeting was the first for a large number of the shareholders, who treated the annual meeting as a chance to get a taste of Disney magic without having to travel to Florida or California.

''We got the notice in the mail, and I thought, what a great opportunity to come and learn something,'' said Keri Aub, a 37-year-old accountant from Mount Laurel, N.J. She brought her 17-year-old nephew, Mathias Koller, who is applying to business schools, and her 3-year-old son, Andrew, who owns 15 shares of Disney stock.

Others did not want to miss being part of something that seemed historic. Barbara and Joanne Kammer, sisters from Lansdowne, Pa., have a room in their house devoted to Disney figurines and collectibles. They said they had visited the Disney theme parks more than 25 times and had owned Disney stock for about 30 years. Both women voted against Mr. Eisner, saying he had faltered in his job.

As shareholders left the meeting, Angela Stevens and her mother, Brenda Stevens, said they were impressed by Mr. Disney, but felt a bit sorry for Mr. Eisner.

''It was really tough in there for Michael,'' said Angela Stevens of Philadelphia. ''It was like he was trying to be a host of a party and all the guests wanted him to leave.''

But the day was not without levity. Evelyn Y. Davis, a shareholder gadfly, grabbed the microphone at one point and expressed her support for Mr. Eisner. She then proceeded to lecture him at length on how he should run Disney. After 10 minutes, the audience booed Ms. Davis until she sat down.